NVIDIA at 16x forward earnings and Microsoft near 30x create the widest P/E gap in the mega-cap space since 2022, shifting risk inside the TOPT ETF.
NVIDIA (NVDA) trades at just above 16x forward earnings. Microsoft (MSFT) sits near 30x. The gap between the two, roughly 14 turns of P/E, is the widest it has been in the mega-cap space since the 2022 selloff, according to Bloomberg data.
That spread reflects a market that is pricing NVIDIA as a cyclical hardware play and Microsoft as a recurring-revenue software annuity. NVIDIA's multiple has compressed as GPU demand normalised after the AI buildout surge. Microsoft's premium has held on the back of cloud and enterprise subscription growth.
The divergence creates a structural question for passive investors. The iShares Top 20 U.S. Stocks ETF (TOPT) holds both names at roughly equal weight. A 14-turn P/E gap inside a single sector allocation is unusual for a cap-weighted fund that tracks the 20 largest U.S. equities by market capitalisation.
Neither stock is cheap by historical standards. NVIDIA at 16x is below its five-year average of 28x but still above the semiconductor sector median of 14x. Microsoft at 30x is roughly in line with its own five-year median of 31x. The compression in NVIDIA's multiple has been driven by earnings growth outpacing price appreciation, not by a decline in the stock itself.
For TOPT holders, the risk is not that either name is overvalued in isolation. It is that the fund's largest two positions now represent two very different risk profiles under the same cap-weighted roof. NVIDIA's cyclicality and Microsoft's defensiveness are normally offsetting. At current multiples, the offset is wider than it has been in recent history, which means the fund's overall volatility profile has shifted toward the hardware side.
A sustained rally in NVIDIA would close the gap and normalise the spread. A further compression would push NVIDIA toward single-digit multiples, which would imply either a sharp earnings miss or a structural downgrade in the AI investment thesis. Neither is priced in today.
Microsoft's multiple is less likely to expand from here without a new catalyst. The stock has held its premium through two years of rate hikes and a mixed cloud spending cycle. That resilience is already in the price.
The next data point that could shift the spread is NVIDIA's October quarter earnings, due in late November. Microsoft reports fiscal first-quarter results in late October. TOPT holders will get both prints inside a four-week window.
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